SEATTLE, April 22 — Microsoft Corp’s turnaround just took a step backward.
The software maker yesterday reported third-quarter earnings that fell short of analysts’ estimates because of a higher tax rate and said sales in the current period will fall short of some projections, sending the shares down. Chief Financial Officer Amy Hood said results are being hurt by weakness in one-time purchases of software, what Microsoft calls its transactional business.
Microsoft Chief Executive Officer Satya Nadella is navigating a transition to cloud and subscription-based products, seeking to lessen its reliance on such one-time purchases. Yet many of its customers still buy the old way, and it’s those clients that are paring purchases as they deal with a sluggish economy, Hood said. Strong growth in cloud services, such as the Azure computing platform and Office 365 software, won’t be enough to make up for the shortfall in the current quarter. Before this report, Nadella had been posting better-than-projected results, fuelling a 31 per cent gain in the stock in the past year.
“There’s still a long ways to go in terms of the multiple-year transition in the company from a Windows and on-premise software company to a cloud, mobile and service-oriented company,” said Sid Parakh, a portfolio manager at Becker Capital Management, which has about US$3 billion (RM11.6 billion) under management.
Microsoft shares fell 4.8 per cent in early trading today to US$53.10, after closing little changed at US$55.78. The stock is up 30 per cent in the past year, compared with a decline of 0.4 per cent on the Standard & Poor’s 500 Index.
Profit excluding certain items in the third quarter, which ended March 31, was 62 cents a share, and sales adjusted for deferrals were US$22.1 billion, Redmond, Washington-based Microsoft said in a statement. Analysts on average estimated profit would be 64 cents on revenue of US$22.1 billion, according to data compiled by Bloomberg. Net income declined to US$3.76 billion, or 47 cents a share.
Estimates didn’t include a one-time tax adjustment to account for an expected increase in the full-year tax rate partly related to its cloud business, Hood said. Without this “catch-up adjustment,” Microsoft would have beaten analysts’ profit projections, she said. The full-year tax rate should be closer to Microsoft’s usual 20 per cent to 21 per cent rather than the 24 per cent adjusted rate in the fiscal third quarter, she said.
Disappointing forecast
Intelligent Cloud unit revenue, made up of Azure and server software, will be US$6.5 billion to US$6.7 billion in the fourth quarter, the company said on a conference call. Sales in Productivity, made up mostly of Office programmes, will be in that same range. More Personal Computing — which includes Windows, Xbox and Surface tablets — will bring in US$8.7 billion to US$9 billion. Some of those numbers were below what many analysts had expected, UBS AG analyst Brent Thill noted on the call, and Hood agreed.
Microsoft has pledged to reach annualised revenue of US$20 billion in its corporate cloud business by the fiscal year that ends in June 2018. At the end of last quarter, that metric stood above US$10 billion, Hood said. The company has been adding customers and workloads for the Azure computing programme, which let clients run and store applications in Microsoft’s cloud-data centres.
Nadella’s transition
The persistent weakness in one-time software purchases and the shifting tax rate shows the transition Nadella is attempting — away from the PC market and these kinds of sales — will be neither simple nor short. It will change Microsoft from a company with the Windows operating system as its flagship to one that relies more on its Office, Azure and the SQL Server database products; from a company selling software that clients buy once and install on their own PCs, in their own offices or data centers, to one that sells more services delivered in the cloud.
In the third quarter, Microsoft’s unearned revenue, a measure of future sales, was US$25.9 billion. Two analysts polled by Bloomberg had expected an average of US$24.8 billion.
The quarter was an abysmal one for worldwide personal-computer shipments, which slid to their lowest quarterly total since 2007, according to market researcher Gartner Inc. Microsoft’s sales of Windows to computer makers fell 2 per cent — better than the overall PC market, but underscoring the impact on the Windows business.
PC software, productivity
Revenue in the More Personal Computing segment, which includes Windows and Xbox, rose 1 per cent to US$9.5 billion, topping the US$9.17 billion average estimate of four analysts polled by Bloomberg, bolstered by increases in search and Xbox Live revenue.
Revenue from productivity software rose 1 per cent to US$6.52 billion. That compares with the US$6.57 billion average analyst estimate. Office 365 revenue climbed 63 per cent in constant currency, the company said.
Dan Morgan, senior portfolio manager at Synovus Securities Inc, said third-quarter revenue in Microsoft’s cloud and server group came in a bit below his projections, particularly given the company’s focus on cloud for future growth. Revenue from Intelligent Cloud, the unit that includes Azure and server software, was US$6.1 billion, compared with the US$6.26 billion average estimate of analysts. — Bloomberg
